1

UNIVERSITY OF MUMBAI

PROJECT REPORT ON

INTERNATIONAL FINANCIAL

REPORTING STANDARD

BY

Mr. OJAS NITIN NARSALE

M.COM (Part-I) (SEM-II) (Roll No.40)

ACADEMIC YEAR 2015-2016

PROJECT GUIDE

PROF. NEETA NERURKAR

PARLE TILAK VIDYALAYA ASSOCIATION’S

M.L. DAHANUKAR COLLEGE OF COMMERCE

DIXIT ROAD, VILE PARLE ( E)

MUMBAI- 400057

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DECLERATION

I, Mr. OJAS NITIN NARSALE of PARLE TILAK VIDYALAYA

ASSOCIATION’S M.L. DAHANUKAR COLLEGE OF

COMMERCE of M.COM(Part-I) (SEM-II) (Roll No.40) hereby

declare that I have completed this project on INTERNATIONAL

FINANCIAL REPORTING STANDARD in the ACADEMIC

YEAR 2015-2016. This information submitted is true and original to

the best of my knowledge.

(Signature of Student)

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ACKNOWLEDGEMENT

To list who all helped me is difficult because they are so numerous

and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.

I would firstly thank the University of Mumbai for giving me chance

to do this project.

I would like to thank my Principal, Dr. Madhavi Pethe for providing

the necessary facilities required for completion of this project.

I even will like to thank our co-ordinator, for the moral support that I

received.

I would like to thank our College Library, for providing various

books and magazines related to my project.

Finally I proudly thank my Parents and Friends for their support

throughout the Project.

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INDEX

Sr No Topic Page

1 About Accounting 5

2 Evolution Of IFRS 6

3 India And IFRS 7

4 Convergence of IFRS and decision to adopt

IFRS

7

5 Road Map 10

6 Roadmap for the adoption Of IND AS

(IFRS)

14

7 Differences between Ind AS and IFRS 16

8 Advantages 30

9 Disadvantages 31

10 Conclusion 35

11 Bibliography 38

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ABOUT ACCOUNTING

The history of accounting or accountancy is thousands of years old and can be traced

to ancient civilizations.

The early development of accounting dates back to ancient Mesopotamia, and is closely

related to developments in writing, counting and money and early auditing systems by the

ancient Egyptians and Babylonians. By the time of the Emperor Augustus, the Roman had

access to detailed financial information.

According to some Indian scriptures, the Indian Chanakya wrote a manuscript similar to a

financial management book, during the period of the Mauryan Empire. His book

"Arthashasthra" contains few detailed aspects of maintaining books of accounts for a

Sovereign State.

The Italian Luca Pacioli, recognized as The Father of accounting and bookkeeping was the

first person to publish a work on double-entry bookkeeping, and introduced the field in

Europe. Accounting began to transition into an organized profession in the nineteenth

century, with local professional bodies in England merging to form the Institute of Chartered

Accountants in England and Wales in 1880.

To develop a broader view of the accounting profession, auditors and accountants need to be

aware of both national and international professional standards. However contemporary

Western schools of thought on accounting do not acknowledge the historical contributions of

non- European cultures. A better-rounded view could be achieved through acknowledging the

accomplishments of non-Western cultures in the development of professional practices,

particularly the accounting profession.

Ancient India is a prime example of a culture whose accounting practices merit more

attention due to their complexity and innovation. Looking back at Indian history, one finds

that the art and practice of accounting were present in India even in Vedic times The Rig-

Veda has references to accounting and commercial terms like kraya (sale), Vanij (merchant),

sulka (price).

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EVOLUTION OF IFRS

The term IFRS has both a narrow and a broader meaning. Narrowly, IFRSs refers to the new

numbered series of pronouncements that the IASB is issuing, as distinct from the

International Accounting Standards (IASs) series issued by its predecessor. More broadly,

IFRSs refers to the entire body of IASB pronouncements, including standards and

interpretations approved by the IASB and IASs and SIC interpretations approved by the

predecessor International Accounting Standards Committee.

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INDIA AND IFRS

On January 18, 2011, the Institute of Chartered Accountants of India (ICAI)

announced their intention to converge with IFRS by issuing an exposure draft calling for

the release of 35 Ind AS’ (Indian Accounting Standards).

After consultation from the Ministry of Corporate Affairs (MCA), the roadmap of

convergence began.

These standards were designed using the ‘Framework for the Preparation and Presentation of

Financial Statements’, prepared by the ICAI, as a reference point. (ICAI, 2011) It is a

decision that is sure to benefit India in the future. IFRS adoption is heavily widespread,

with around 141 countries permitting or requiring it either completely or in part

according to a 2014 study by PwC.

With India enjoying high economic growth and added importance as a burgeoning

superpower in the world, there is a growing need for adherence to international standards

of business.

CONVERGENCE OF IFRS AND DECISION TO ADOPT IFRS

The convergence to IFRS was going relatively slow in India until the

Parliament passed the new Companies Act, requiring the preparation of consolidated

financial statements. (MCA, 2014) This has urged the ICAI to make a concrete roadmap,

which it recently finalized during its council meetings on March 20-22, 2014.

It is important to define the terms harmonization,

standardization and convergence. Convergence is the process of bridging gaps between

two different entities, in this case being IFRS and the country trying to adopt it.

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According to Christopher Nobes, harmonization is “a process of increasing the

compatibility of accounting practices by setting bounds to their degree of variation”. If

everything is completely compatible, a state of harmony is reached.

Nobes defines standardization as “working towards a more rigid and narrow set of rules.”

(Nobes &Parker, 2010, p. 75) It wouldn’t be erroneous to state that both the terms are similar.

IASB, the body that produces IFRS, has worked towards worldwide harmonization of

accounting standards since its inception.

A cautionary tale regarding the need for a uniform set of accounting standards is

the Asian financial crisis in the late 1990s. Investors believed that Thailand would no

longer be suitable for foreign investment and took back their money, creating an

economic crisis. A contagion effect occurred in countries like Indonesia and South Korea,

nations with similar economies to Thailand due to their trade links. (Walker, 1998)

Indonesia suffered heavily in the crisis despite having a healthy economy. A universal set

of accounting standards could have gone some way to stopping it, as the investors would

have made better decisions regarding their money.

Today, the general consensus is that there is a need for a uniform set of

accounting standards system worldwide. There are various advantages and a few

disadvantages to this.

For India, acknowledgement of convergence to IFRS will give

them access to capital markets that were previously not available to use for them. Stock

appraisers and financial analysts from different countries will now be able to analyze

Indian firms due to their comparability.

Convergence to IFRS gives investors and analysts added confidence to make the right choice

when it comes to investment decisions. This, in turn, could result in reducing the cost of

capital. Another advantage lies in the fact that India receives a lot of FDI due to the increased

prevalence of multinational corporations. India’s status as a growing superpower attracts

many MNCs.

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Comparable financing reporting will be beneficial for both the MNCs involved and India

as well. The work of MNC accountants would be much easier if all the countries had

similar financial statements. In most cases, MNCs operate in countries using IFRS as a

benchmark. Knowing that India has agreed to converge could create interest from more

MNCs to set up operations in India. It will also be easier for MNCs to move their

financial staff to different countries because of the comparability.

Despite an overwhelming gamut of positives resulting from convergence to a

universal set of standards, there remain a few disadvantages. IFRS still has not been able

to achieve an accord with the United States and their use of GAAP. Indian companies

will not be able to access the United States’ vast capital market unless it writes statements

that conform directly to IFRS. Another disadvantage is that every country has a specific

reason for using financial reporting. Some use it for tax purposes, some for obtaining

capital. Complete harmony is hard to achieve due to the individual prerogatives of each

country when it comes to their financial reporting. This is one of the reasons why IASC

didn’t achieve that much support in the Eastern European countries as well as Japan

before it became the IASB.

MCA’s roadmap is facing some delays primarily due to tax issues, an example of how it is

hard to achieve standardization in every country.

There are already various differences between Ind AS and IFRS in order to accommodate

India’s economic climate.

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ROADMAP AND DECISION TO ADOPT IFRS

In 2007, the ASB of the ICAI produced a Concept Paper made by their task force and

submitted it to the ICAI. The ICAI made a public commitment of convergence to IFRS

before 31 December, 2011. This announcement gained traction in the Indian political

climate, leading to the government announcing the same commitment of converge by the

end of 2011 a year later from the announcement by the ICAI. Even during its inception,

the aim of convergence was not to fully conform to IFRS but rather to modify the

standards for acclimatization to India’s business environment. Factors such as “the legal

and regulatory environment, economic conditions, industry preparedness and practice as

well as the removal of some options permitted under IFRS” (ESMA, 2014, p. 8) were

implemented to create a sense of compromise between IFRS and the way business is

done in India.

In February 2011, the MCA released a total of 35 Ind AS’ on their website, with

each standard containing an appendix highlighting the differences between it and its

counterpart in the IFRS. (There were some standards not included: IFRS 9 – Financial

Instruments, IAS 26 – Accounting and Reporting by Retirement Benefit Plans and IAS

41 – Agriculture) What was baffling about the release of these standards at the time was

that they were neither notified under the Companies Act of 1956 nor corroborative with

tax functions for the government. Following the release of the standards, the ICAI

continued to revise or add new standards to the fray. Revision was done through

consultation with the NACAS, with additional standards being added whenever the IASB

issues more IFRS’. (ICAI, 2011)

The initial press release by the MCA while they were in the process of preparing

the standards indicated a three-phased roadmap for Indian companies, as deadlines were

set for certain companies to conform to Ind AS by April 1st of 2011, 2013 or 2014. The

date of conformation was based on a range of criteria applicable to the net worth of a

company. Prominent insurance companies in India were slated to conform by 2012,

whereas banks in India had to accept these changes either in 2013 or 2014, dependent on

the volume and nature of their activities. This proved to be a hasty decision, as the MCA

had another press release following the issuance of the standards during February 2011,

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where they indicated that the earlier deadlines could not be implemented in such a rigid

manner. Mostly due to tax-related reasons, the MCA decided to scrap the earlier plan and

announced that another roadmap would be provided once the various kinks were sorted.

From that time till present, various measures have been undertaken by the Indian

government to allow smoother harmonization. 2013 saw the Indian government adopting

a new Companies Act in order to facilitate the various new provisions convergence to

IFRS required. To resolve issues of tax, the Indian Ministry of Finance drafted Tax

Accounting Standards to account for the conflicts between accounting and taxation. The

ICAI performed several impact analyses to examine how these standards would change

the course of business for large companies as well as SMEs in various sectors. (ESMA,

2014) 2013 saw Prabhakar Kalavacherla, the only Indian member on the board of the

IASB, leave the organization after a five year term to join KPMG. There were concerns

regarding how this would affect India’s influence in the IASB. It wouldn’t be erroneous

to state that India continues to possess importance in the organization despite the

departure of Kalavacherla. The fact that India recently hosted the 8th IFRS Regional24

Policy Forum in March 2014 is testament to that. (ESMA, 2014, p. 12)

On 11 July 2014,

Finance Minister Arun Jaitley proposed the budget to the Indian Parliament, with one of

the topics of discussion being convergence of Ind AS and IFRS. Here is an excerpt of his

speech:

“There is an urgent need to converge the current Indian accounting standards with the

International Financial Reporting Standards (IFRS). I propose for adoption of the new

Indian Accounting Standards (Ind AS) by the Indian companies from the financial year

2015-16 voluntarily and from the financial year 2016-17 on a mandatory basis. Based on

the international consensus, the regulators will separately notify the date of

implementation of AS Ind for the Banks, Insurance companies, etc. Standards for the

computation of tax would be notified separately.” (India Budget, 2014)

The most recent revised roadmap from the ICAI came as a by-product of Jaitley’s

words. On 16 February 2015, the MCA set forth new dates of Ind AS applicability for

certain companies that qualified. Adoption to the IFRS meant the creation of financial

statements. The Companies Act of 2013 decomposes financial statements into five facets:

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“a balance sheet, a profit or loss account (equivalent to the income statement in the US),

cash flow statement, a statement of changes in equity (equivalent to the statement of

retained earnings in the US) and any explanatory notes.” (MCA, 2013) The first time

adoption date is slated to the accounting period beginning on or after 1 April 2016 for

companies with the following criteria:

a) Entities listed or in the process of listing on any stock exchange in India or abroad,

containing a net worth of Rs. 500 crores or more (equivalent to 80.25 million USD). The

New Companies Act of 2013 defines net worth as a formula equivalent to “paid-up share

capital + reserves created out of the profits (excludes reserves created out of revaluation of

assets, write-back of depreciation and amalgation) + securities premium account –

accumulated losses – deferred expenditure – miscellaneous expenditure not written off as per

the balance sheet.”

b) Unlisted companies having a net worth in excess of Rs. 500 crore

c) Holding, subsidiaries,

The comparative for these financial statements will start with periods “ending 31 March

2016 or thereafter”. The first instances of these financial statements must be submitted

using the Ind AS on financial years ending on 31 March 2017.

The MCA set forth additional rules for companies who did not qualify in the

criteria described to be required for mandatory Ind AS adoption on 1 April 2016. It set

forth mandatory adoption to IFRS exactly a year later than the aforementioned companies

(the date being 1 April 2017) for companies which met the following criteria:

a) Listed companies having a net worth of less than Rs. 500 crore

b) Unlisted companies having a net worth of more than Rs. 250 crore but less than Rs. 500

crore (the latter would conflict with the criteria set forth in the guidelines provided for a year

earlier)

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c) Holding, subsidiaries, joint venture or associated of the companies attested to be in a) or b)

The comparative for these financial statements will start with periods “ending 31 March

2017 or thereafter”. The first instances of these financial statements must be submitted

using the Ind AS on financial years ending on 31 March 2018. Once these companies

start their conformation to Ind AS, they are not allowed to change should they veer away

from the criteria that previously mandated them to adopt Ind AS. (Deloitte, 2015, p. 4)

The announcement on 16 February, 2015 also announced the concept of voluntary

adoption. This is seen as beneficial by many countries who want to promote themselves

worldwide. IFRS is seen as the prevalent accounting standard of the world today and Ind

AS uses its template and is seen as very similar (though there may be some differences

that cannot be reconciled). The MCA announced that companies “may voluntarily adopt

Ind AS for financial statements for accounting periods beginning on or after 1 April

2015, with the comparatives for the periods ending on 31 March 2015 or thereafter.”

However, similar to the aforementioned companies, this option is irrevocable.

Once Ind AS is adopted, it cannot change it for all their subsequent financial

statements. Adoption indicates compliance of companies to both its standalone financial

statements and consolidated financial statements. An overseas subsidiary, associate, joint

venture, etc. of an Indian company is required by the respective parent company to

prepare its consolidated statements in Ind AS, even if they are required in other countries

to prepare different financial statements. Similarly, an Indian company which happens to

be a joint venture, subsidiary, associate, etc. of a foreign company must comply with Ind

AS if it meets the criteria mentioned earlier. The rules clearly do not apply for companies

not attaining the criteria mentioned above, but they also do not apply to companies whose

securities are already listed or are on the process of being listed on SME exchanges

(Small and Medium Enterprises). An interesting rule set forth by the ICAI roadmap

concerns Indian companies already using IFRS to conduct business. To get into the

Indian market, these companies must use Ind AS in their consolidated statements. This

rule brings queries over whether there are significant differences between IFRS and Ind

AS

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ROADMAP FOR THE ADOPTION OF IND AS (IFRS)

Roadmap drawn-up for implementation of Indian Accounting Standards (Ind AS) converged

with International Financial Reporting Standards (IFRS) for Scheduled Commercial Banks

(Excluding Rrbs), Insurers/Insurance Companies and Non-Banking Financial Companies

(NBFC’s)

In pursuance to the Budget Announcement by the Union Finance Minister Shri Arun Jaitley,

after consultations with Reserve Bank of India (RBI), Insurance Regulatory and Development

Authority(IRDA) and Pension Fund Regulatory and Development Authority (PFRDA), the

following roadmap for implementation of Indian Accounting Standards (Ind AS) converged

with International Financial Reporting Standards (IFRS) for Scheduled commercial banks

(excluding RRBs), insurers/insurance companies and Non-Banking Financial Companies

(NBFC’s) has been drawn up:

(I.) Scheduled commercial banks (excluding RRBs) and Insurer/Insurance Companies:

(a) Scheduled commercial banks (excluding Regional Rural Banks (RRBs), All-India Term-

lending Refinancing Institutions (i.e. Exim Bank, NABARD, NHB and SIDBI) and

Insurers/Insurance companies would be required to prepare Ind AS based financial statements

for accounting periods beginning from April 1, 2018 onwards, with comparatives for the

periods ending March 31, 2018 or thereafter. Ind AS would be applicable to both

consolidated and individual financial statements.

(b) Notwithstanding the roadmap for companies, the holding, subsidiary, joint venture or

associate companies of Scheduled commercial banks (excluding RRBs) would be required to

prepare Ind AS based financial statements for accounting periods beginning from April 1,

2018 onwards, with comparatives for the periods ending March 31, 2018 or thereafter.

(c) Urban Cooperative Banks (UCBs) and Regional Rural Banks (RRBs) shall not be

required to apply Ind AS and shall continue to comply with the existing Accounting

Standards, for the present.

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(II.)NBFCs:

NBFCs will be required to prepare Ind AS based financial statements in two phases:

(a) Under Phase I, the following categories of NBFCs shall be required to prepare Ind AS

based financial statements for accounting periods beginning from April 1, 2018 onwards with

comparatives for the periods ending March 31, 2018 or thereafter. Ind AS would be

applicable to both consolidated and individual financial statements.

(i) NBFCs having net worth of Rs.500 crores or more.

(ii) Holding, subsidiary, joint venture or associate companies of companies covered under

(a)(i) above, other than those companies already covered under the corporate roadmap

announced by the Ministry of Corporate Affairs (MCA), Government of India (GoI).

(b) Under Phase II, the following categories of NBFCs shall be required to prepare Ind AS

based financial statements for accounting periods beginning from April 1, 2019 onwards with

comparatives for the periods ending March 31, 2019 or thereafter. Ind AS would be

applicable to both consolidated and individual financial statements.

(i) NBFCs whose equity and/or debt securities are listed or are in the process of listing on any

stock exchange in India or outside India and having net worth less than Rs.500 crores.

(ii) NBFCs other than those covered in (a)(i) and (b)(i) above, that are unlisted companies,

having net worth of Rs.250 crores or more but less than Rs.500 crores.

(iii) Holding, subsidiary, joint venture or associate companies of companies covered under

(b) (i) and (b)(ii) above, other than those companies already covered under the corporate

roadmap announced by the MCA, GoI.

NBFCs having net worth below Rs. 250 Crores and not covered under the above provisions

shall continue to apply Accounting Standards specified in Annexure to Companies

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(Accounting Standards) Rules, 2006.

(III.)Scheduled commercial banks (excluding RRBs)/NBFCs/insurance companies/insurers

shall apply Indian Accounting Standards (Ind AS) only if they meet the specified criteria,

they shall not be allowed to voluntarily adopt Indian Accounting Standards (Ind AS). This,

however, does not preclude an insurer/insurance company/NBFC from providing Ind AS

compliant financial statement data for the purposes of preparation of consolidated financial

statements by its parent/investor, as required by the parent/investor to comply with the

existing requirements of law.

LIST OF DIFFERENCES BETWEEN IND AS AND IFRS

There are currently 39 Ind AS published in tandem by the ICAI and the MCA. To

analyze the differences between Ind AS and IFRS, I used the 2015 Deloitte report titled

“Indian GAAP, IFRS and Ind AS: A Comparison” and the 2011 PwC report titled

“Decoding the differences: Comparison of Ind AS with IFRS.”

Types of Differences:

The point of this research paper is to headline the big, irreconcilable differences between

Ind AS and IFRS so that one could look with added importance to these facets and try to

solve them. All quotations in this subsection are taken either from the 2015 Deloitte

report titled “Indian GAAP, IFRS and Ind AS: A Comparison” or the 2011 PwC report

titled “Decoding the differences: Comparison of Ind AS with IFRS.” It would be

advisable at this point to separate the aforementioned differences into various subcategories

based on their various degrees of irreconcilability. Therefore, the subcategories

are the following: possible irreconcilable differences, repairable differences and textual

differences. The difference between repairable differences and textual differences lies in

theory and practice: repairable differences involve different business practices between

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Ind AS and IFRS that can be reconciled without much degree of difficulty, whereas textual

differences are those in which contrast can only be found in definitions, formats

or types of disclosure.

The focus is mostly on the possible irreconcilable differences between Ind AS and

IFRS, something explored in the next chapter. These are the possible irreconcilable

differences found:

• Ind AS 103: Business Combinations in contrast to IFRS 3: Business

Combinations

• Ind AS 19: Employee Benefits in contrast to IAS 19: Employee Benefits

• Ind AS 32: Financial Instruments-Presentation in contrast to IAS 3

Since these three important facets are discussed with heavy detail in the

subsequent chapter, it would be advantageous to separate the rest of the differences into

repairable and textual. In the case where one standard contains both repairable and textual

differences, it is classified in the repairable difference category. The following contains

all the repairable differences between Ind AS and IFRS:

• Ind AS 1 – Presentation of Financial Statements: The repairable difference in this

standard has to do with breaching certain covenants of long-term liabilities and

whether it should be a current liability if the lender has not demanded payment as

a consequence of the aforementioned breach. It is when the lender agrees after the

reporting period but before the approval of financial statements where IFRS and

Ind AS differ in their practicality. IFRS continues to classify the liability as

current even if the lender has agreed in that time, whereas Ind AS does not.

Textual differences include a) differences in terminology; b) recent amendments

to IFRS not seen in Ind AS as of yet; c) IFRS conducting an expense analysis

based on either nature or function while Ind AS uses only nature; and d) the

option of giving single as well as separate statements of profit & loss as well as

OCI in IFRS whereas Ind AS only allows for a single income statement

containing both.

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• Ind AS 10 - Events after the Reporting Period: The difference lies in what each

set of standards does with lender permission after the reporting period but before

the financial statements are due as aforementioned, thus making it practical by

nature.

• Ind AS 12 – Income Taxes: Due to Ind AS’ practicality-altering ban of the fair

value model, one cannot measure investment property with regards to income

taxes. Another repairable difference in income taxes is seen in business

combinations when the carrying amount of goodwill is zero. According to IFRS,

any remaining deferred tax benefit is recognized in profit & loss whereas in Ind

AS, it is recognized in OCI and subsequently accumulated either in equity as a

capital reserve or recognized directly in capital reserve.

• Ind AS 17 – Leases: Property interests in operating leases are recognized in IFRS

using the fair value model, not allowed in the Indian accounting environment.

Another facet of leases seen as repairable is in lease income from operating

leases. IFRS instantly recognizes it on a straight-line basis while Ind AS contains

a provision for protection against inflation in which case straight- line basis should

not be used.

• Ind AS 21 – The Effects of Changes in Foreign Exchange Rates: There are

repairable as well as textual differences in this standard when compared to its

IFRS counterpart. A repairable difference is that IFRS requires that all gains and

losses arising on retranslation of monetary assets and liabilities denominated in a

foreign currency to be recognized in profit or loss. “Ind AS adds an option for

entities if the entity wants to recognize unrealized exchange differences arising on

translation of long-term monetary items denominated in a foreign currency

directly in equity, and accumulated as a separate component therein. These

differences must be sufficiently transferred to profit & loss over the period of

maturity. The option is exercisable when the differences are initially recognized.

Once exercised, it is irrevocable and applied for all long term monetary items.”

Textual differences in this standard include a) a change in an entity’s functional

currency must disclose the fact and reason of change as denoted by IFRS whereas

Ind AS adds another disclosure to the mix with the date of change; and b) during

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the beginning year of convergence to Ind AS, entities are given an option to use

the previous year’s policy as per Indian GAAP.

• Ind AS 24 – Related Party Disclosures: There is a repairable as well as a textual

component to this standard. The repairable difference arising from Ind AS

containing an option which eliminates the need for related party disclosures if

they conflict with “the confidentiality requirements of statute, a regulator or

similar competent authority, on the basis that accounting standards cannot

override legal/regulatory requirements.” IFRS requires that disclosures be made in

any case. What makes this difference somewhat problematic is the fact that

entities can misuse it to their advantage. Also, the term similar competent

authority is quite vague and easy to be misrepresented. The textual difference

involves the definition of a close member of the family. Ind AS has rigid rules for

this, indicating that a brother, father, mother and sister automatically qualify as a

close member of the family and are already included. IFRS focuses the criterio n

onto people who may be expected to influence, or be influenced by, that

individual in their dealings with the entity.

• Ind AS 28 – Investments in Associates and Joint Ventures: This can be

subdivided into one repairable difference and two textual differences. The

repairable difference is what IFRS and Ind AS both individually do to any excess

of the investor’s share of net fair value of the associate’s identifiable assets and

liabilities over the cost of investments. For IFRS, it is included in profit & loss

during the same period it occurs in. For Ind AS, it is directly recognized as capital

reserve in equity. The two textual differences are a) the absolute need for uniform

accounting policies in IFRS whereas in Ind AS, there is a need unless it is

impracticable to do so; and b) Ind AS prohibits the use of equity method for

investments in subsidiaries, allowing only for the use of cost whereas IFRS gives

the entity an option between cost or equity method.

• Ind AS 38 – Intangible Assets: Usually, adoption to IFRS means a holistic ceding

to its policies and practices. However, Ind AS allows some leeway when it comes

to using the same amortization policy of intangible assets related to service

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concession arrangements when it comes to toll roads as it did in Indian GAAP. It

allows the entity to incorporate the same policies used in Indian GAAP during the

first new years of Ind AS convergence. This option is not seen in IFRS.

• Ind AS 101 – First Time Adoption of Ind AS: There are elements of this already

discussed in previous sections, such as what to do with exchange differences

arising from translation of long-term foreign currency monetary items,

amortization of intangible assets arising from service concession arrangements

and zero goodwill from previous business combinations. The major differences

seen in this area have to do with the transitional relief, a sort of comfort against

the whirlwind of change that is Ind AS. These reliefs allow an entity to continue

using some of the policies it did during Indian GAAP for various topics, whether

it be lease classification, non-current assets held for sale or discontinued

operations, or previous P,P&E carrying values (also includes intangibles as well

as investment properties).

• Ind AS 110 – Consolidated Financial Statements: The difference in this has to do with

investment property measurement, done in IFRS through fair value basis.

The fair value model is not yet allowed in Ind AS.

• Ind AS 114 – Regulatory Deferral Accounts: Ind AS provides transitional relief to

“an entity subject to rate regulation coming into existence after Ind AS coming

into force or an entity whose activities become subject to rate regulation

subsequent to preparation and presentation of first Ind AS financial statements”,

allowing them to use previous Indian GAAP policies. IFRS does not require that

an entity adopt this standard. However, once the standard is adopted, one must

continue using it for its subsequent financial statements.

• Ind AS 115 – Revenue from Contracts with Customers: Variable considerations in

the form of penalties are measured in Ind AS as per the substance of the contract.

This is something not seen in IFRS.

Finally, this section contains all the standards that have only textual differences in

its literature and function:

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• Ind AS 7 – Statement of Cash Flows: Ind AS contains stringent rules on what to

do with interest and dividends, something that IFRS gives an entity leeway to, as

long as there is consistency between period to period. Ind AS gives different rules

for financial entities when compared to others, as interest paid and received as

well as dividend received are operating activies. Furthermore, dividend paid is a

financing activity. For all other entities in compliance with Ind AS, interest and

dividend received are investing activities while interest and dividend paid are

financing activities.

• Ind AS 20 – Accounting for Government Grants and Disclosure of Governmental

Assistance: There are two textual differences seen in this standard. The first one

involves what IFRS and Ind AS do with government grants related to assets. IFRS

puts them in the statement of financial position either as deducted from the

carrying amount of the asset or as deferred income. Ind AS gives only the option

of placing it as deferred income. Another difference involves non-monetary

government grants. In IFRS, an entity can use either at fair value or nominal

amount, whereas in Ind AS, they are classified only at fair value.

• Ind AS 27 – Separate Financial Statements: The difference involves accounting

for the investments in subsidiaries in separate financial statements of the parent.

IFRS either uses the cost method (IFRS 9) or equity method (IAS 28), whereas in

Ind AS, an entity is only allowed to use the cost method.

• Ind AS 29 – Financial Reporting in Hyperinflationary Economies: The difference

involves the various disclosure requirements when the economy is in

hyperinflation. IFRS requires that disclosures be made regarding the measuring

unit current at the end of the financial period, whether financial statements are

based on historical or current cost as well as the identity and level of the price

index at the end of the reporting period. In addition to this, Ind AS asks for

another disclosure in the form of the total duration of the hyperinflationary

situation.

22

• Ind AS 33 – Earnings Per Share: There are three main differences seen in this

section. The first involves what entities require EPS. For Ind AS, this involves all

entities issuing ordinary shares applicable to the Companies Act. In IFRS, this is

applicable to all parents or companies part of a parent:

“i) whose ordinary shares or potential ordinary shares are traded in a public market (a

domestic or foreign stock exchange or an over-the-counter market, including local and

regional markets); or

ii) that files, or is in the process of filing, its financial statements with

a securities commission or other regulatory organization for the purpose of

issuing ordinary shares in a public market.”

The difference lies in the stringency.The second difference involves EPS when there are both

consolidated and separate financial statements.

In IFRS, EPS is only required in the consolidated statements, with a voluntary option in

separate statements. In Ind AS, EPS is required to be presented in both. The third difference

involves Ind AS and its recognition of income or expenses in the capital reserve account. In

the cases where it does this, profit & loss from continuing operations should be adjusted to

calculate a correct EPS. This is not seen in IFRS, which immediately dispenses it

in profit & loss.

• Ind AS 40 – Investment Property: The only difference in this standard involves

which technique an entity measures investment property with. IFRS allows an

option or either cost or fair value. For Ind AS, the fair value option is not allowed,

therefore making investment property only at cost.

23

POSSIBLE IRRECONCILABLE DIFFERENCES

Using an analysis of all the differences between Ind AS compared to IFRS, it

wouldn’t be erroneous to state that there are three possible irreconcilable differences

amongst the two sets of standards. All quotations in this subsection are taken either from

the 2015 Deloitte report titled “Indian GAAP, IFRS and Ind AS: A Comparison” or the

2011 PwC report titled “Decoding the differences: Comparison of Ind AS with IFRS.”

These three differences are seen in the standards Ind AS 19 – Employee Benefits, Ind AS

Financial Instruments: Presentation and Ind AS 103 – Business Combinations.

1: Ind AS 19 – Employee Benefits

The possible irreconcilable difference in this topic lies in the usage of the discount

rate for post-employment benefit obligations. IAS 19 in IFRS indicates that the discount

rate must be computed by referring to market yields on high quality corporate bonds at

the end of the reporting period. However, IFRS also acknowledges the fact that some

countries do not have deep markets for these bonds. In that case, a replacement is used in

the form of government bond yields. It is to be noted that one cannot use government

bond yields in IFRS unless there is no deep market for high quality corporate bonds.

Ind AS 19 acknowledges that India possesses no such deep market for high

quality corporate bonds as such. It explicitly states that there is a requirement to use only

the market yield for government bonds to find the discount rate for post-employment

benefit obligations. There is no literature from the ICAI or the MCA regarding high

quality corporate bonds. It has removed the option of using high quality corporate bonds

on the likely reason that India does not possess a deep market for them.

However, that reasoning is very archaic when considering the internat ional nature

of business today. While the difference is not said to affect solely domestic companies,

most companies that are required to adhere to Ind AS soon are unlikely to be solely

domestic. Successful Indian companies have succeeded in establishing overseas

subsidiaries in countries where there are markets for high quality corporate bonds. These

overseas subsidiaries are likely to have defined benefit schemes. If they are in countries

that have a deep market for high quality corporate bonds, such as the UK or the US, it

will lead to an irreconcilable difference. Those subsidiaries will have to submit financial

reports adhered to the country they are operating in as well as to their parent Indian

company. This is where the difference will arise.

24

The parent Indian company will ask for the discount rate to be referenced to

government bonds, whereas the regulatory bodies of the country they are operating in

will likely ask for the discount rate to be referenced to high quality corporate bonds. The

difference in amounts will lead to confusion by the subsidiary, as it will then need to

show two different calculations when it comes to post-employment benefit obligations.

One might argue that this irreconcilable difference can be easily solved should Ind

AS change its literature a tad to reflect on the international nature of business. It must

realize that companies that are forcefully required to adhere to Ind AS in the next two

years are likely to have subsidiaries or operations in countries that possess a deep market

for high quality corporate bonds. These companies are likely to have discrepancies when

they too come across previously-outlined situations that cause differences. The literature

of Ind AS is also neglecting the fact that India could also possess a deep market for high

quality corporate bonds in the years to come, especially since India is one of the world’s

fastest growing economies.

A solution to the ICAI or the MCA would be to reinstate the original language of

the corresponding standard in the IFRS onto Ind AS 19. Not only would this provide

greater clarity to the situation, it will also limit differences that are likely to appear if the

literature is the same as it is now. The current Ind AS 19 literature has several problems

to it. Firstly, it ignores India’s prospects of procuring a deep market for high quality

corporate bonds in the future. Should India be capable of doing this, the literature will

have to go through a change anyways once it does so. High quality corporate bonds

provide a much better reference point to the discount rate for post-employment benefit

obligations than government bonds. Secondly, it ignores the fact that business is very

international in nature today. Should companies adopt Ind AS, there is a high probability

that differences will occur if these companies have operations or subsidiaries in countries

with deep markets for high quality corporate bonds. While this can be currently classified

as a potentially irreconcilable difference, a solution to fixing this is not that hard to

formulate or implement. In fact, it wouldn’t be erroneous to state that the proposed

solution is better for Ind AS’ future than the current state of rules.

25

2: Ind AS 32 – Financial Instruments: Presentation

The possible irreconcilable difference in this section between Ind AS and IFRS

arises when it comes to the definition of a financial liability. When it comes to the

conversion option embedded in a foreign currency convertible bond (FCCB), IFRS only

recognizes equity in the form of the entity’s functional currency. Thus, IFRS users have

to fair value this instrument at the end of every reporting period, with differences being

accounted for in profit & loss. Ind AS 32 gives more legroom for its entities to maneuver,

allowing the FCCB to be classified as an equity instrument “if it entitles the holder to

acquire a fixed number of entity’s own equity instruments for a fixed amount of cash, and

the exercise price is fixed in any currency.” In the case of Ind AS, there is no specific

need to use fair value as a means to re-measure, as IFRS users are required to do.

A question must be asked over why the ICAI insisted on these provisions in

which these instruments can be exercised in any currency. A prevailing reason is that

these provisions were made to prevent income statement volatility that arises from IFRS

accounting for “(a) translations of long term monetary items from foreign currency to

functional currency (i.e. IAS 21) and (b) equity conversion options in a foreign currency

convertible bond denominated in foreign currency to acquire a fixed number of entity’s

own equity instruments for a fixed amount in a foreign currency (i.e. IAS 32).” Indian

companies are known to issue long-term FCCBs in a currency different from the entity’s

functional currency in order to obtain foreign funds at a competitive rate. These

instruments contain a relatively simple conversion option, as the number of shares to be

issued at a certain fixed foreign currency is indicated in all the literature accompanying it.

These FCCBs will cause differences should they be accounted for either in IFRS or in Ind

AS.

In IFRS, these FCCBs will undergo split accounting due to their convertible

nature, meaning that these bonds will be separated into two components and subsequently

accounted for in different ways. The pure liability portion of the FCCB is initially

measured at fair value, with subsequent measurements to be done in amortized cost. Any

foreign exchange translation difference resultant to this has to be recognized in the

respective year’s profit & loss account. The conversion feature of this FCCB is treated by

IFRS as a derivative liability. It treats it as a liability rather than equity because of its

failure to achieve the “fixed-for-fixed condition”, seen in IFRS literature as “a contract

26

that will be settled by the entity (receiving or) delivering a fixed number of its own equity

instruments in exchange for a fixed amount of cash or another financial asset is an equity

instrument.” The fact that there is exchange rate variation negates this fixed-for-fixed

condition, making both portions of the convertible bond different types of liability. Once

again, the profit & loss account is used as an offset for any kind of future re-measurement

seen in this account as well.

It is in the latter component of the accounting described in the paragraph above

where differences start to arise between Ind AS and IFRS. Ind AS 21 allows companies

an irrevocable option to recognize exchange differences on the translation of long term

monetary items (similar to the discussed FCCBs) from foreign currency to functional

currency in equity. These amounts in equity will subsequently be transferred to profit &

loss throughout the maturation of the FCCBs. This rule proves to be in direct opposition

to the guidelines prescribed by IFRS. Under these rules, the component which is seen as a

derivative liability by IFRS will be seen as equity under Ind AS. This will prove to have

big irreconcilable differences should the entity write its financial statements in both IFRS

and Ind AS.

Unlike Ind AS 19, there seems to be greater difficulty associated with trying to

reconcile this difference and envisioning a common solution. The easiest solution could

be to remove the irrevocable option described in Ind AS 21 that allows you to recognize

exchange differences on the translation of these instruments from foreign currency to

functional currency in equity. However, Ind AS 19 has prescribed this option in order to

facilitate a clean transition from Indian GAAP to Ind AS. Many companies will not be

happy about the move to Ind AS should the transition cause widespread negative impact

for covenants required to be at a certain level for them to obtain external financing.

Classifying both convertible portions as liability is certain to negatively impact certain

ratios, as there is a marked increase to liability. A possible solution could be to change

the literature once companies get a grasp of Ind AS, probably within five or ten years of

adopting it. This would give companies more time to try and ponder solutions for this

increase in liability. It would also give Indian companies more impetus to adopt Ind AS

for the time being, as the current Ind AS literature allows for the policies for long term

monetary assets to be the same as they were for Indian GAAP. This makes it easier for

companies slated to convert to Ind AS in the next two years to make a quicker transition

27

to these rather new and alien sets of accounting standards.

3: Ind AS 103 – Business Combinations

Unlike the previous two standards, Ind AS 103 contains two possible

irreconcilable differences in its literature that set it apart from IFRS. The first possible

irreconcilable difference arises when accounting for business combinations of entities

under common control. Common Control is defined by US law in 13 CFR 107.50 as “a

condition where two or more persons, either through ownership, management, contract or

otherwise, are under the control of one group or person. Two or more licensees are

presumed to be under common control if they are affiliates of each other by reason of

common ownership or common officers, directors or general partners; or if they are

managed or their investments are significantly directed either by a common independent

investment advisor or managerial contractor, or by two or more such advisors or

contractors that are affiliates of each other.”

IFRS 3 does not have the concept of common control in its scope itself.

Meanwhile, Ind AS 103 acknowledges and gives guidance on what to do regarding

accounting of these assets under common control. It prescribes the pooling of interests

method to account for this type of business combination. The pooling of interests method

is a rather simple one, with the hallmark of it being the usage of book value rather than

fair value. When using the pooling of interests method, the balance sheets of the two

companies are simply added together, line item by line item. When arriving at the

consideration, it is compared to the amount of share capital. Ind AS 103 also has

guidance on what to do when there is an excess or shortfall relative to the amount of

share capital. When the consideration is in excess of the amount of share capital, it is

recorded as goodwill. When the consideration is less than the amount of share capital, it

is treated as a capital reserve.

An additional guideline that Ind AS 103 prescribes for business combinations

under common control is the restatement of previous financial information. It proclaims

28

that “financial information in respect of prior period should be restated as if the business

combination has occurred at the beginning of the earliest period presented in the financial

statements, irrespective of the actual date of combination.” IFRS users who are confused

about what to do with common control business combinations typically revert to two

options: either the fair value method that is used for all other business combinations

described in IFRS 3 or the usage of the pooling of interests method, using predecessor

accounting as the setup. Furthermore, any excess consideration received by using the

pooling of interests method in IFRS is not taken to be new goodwill. Any excess or

negative consideration over aggregate book value of the assets and liabilities of the

acquired entity is included either in retained earnings or in a separate reserve. Therefore,

the whole concept of business combinations under common control will have big possible

irreconcilable differences with IFRS should there be any goodwill or additions to capital

reserve recognized.

The second possibly irreconcilable difference in this section arises with regards to

accounting for the gain on a bargain purchase. A bargain purchase is defined as one

where the cost of acquiring a business is lower than the fair value of all that business’

assets and liabilities. In IFRS, any gain arising from such a purchase is immediately

recognized in profit & loss. This is not seen in Ind AS 103, as the literature prescribes

that this gain be recognized in OCI and accumulated in equity as a capital reserve. If

there is no clear evidence indicating that this purchase is indeed a bargain purchase, the

gain is directly recognized as a capital reserve in equity, with no requirements for

recognition in OCI.

When looking at these two differences, it wouldn’t be incorrect to state that the

first difference is more irreconcilable than the second. The second difference is seen in

other instances, such as Ind AS 12 or Ind AS 28, and has the capability to be avoidable.

The first difference is worth searching solutions for. The one instance where there could

be an irreconcilable difference is when there is a big excess of consideration when

compared with the amount of share capital, resulting in a large amount of goodwill

prescribed by adhering to Ind AS. This goodwill, in IFRS, will immediately be kept in

retained earnings or in a separate reserve.

A possible solution is to abolish the concept of common control transactions from

Ind AS literature, indicating that the only possible procedure to follow in such a case

29

would be correlated to what would be done in IFRS. However, the concept of business

transactions of entities under common control is seen in a lot of Indian entities, who

would all prefer to use the pooling of interests method as compared to the fair value

method. Amidst all the massive changes from Indian GAAP to Ind AS, abolishing the

pooling of interests method would not be popular move. In fact, when the FASB

announced that all business combinations should be accounted for using the purchase

method rather than the pooling of interests method on January 23, 2001, the move was

under wide opposition by the business community.

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ADVANTAGES AND DISADVANTAGES OF CONVERGENCE WITH REGARDS

TO INDIAN ECONOMY

It would be profitable to list out the advantages and disadvantages/challenges of convergence

to IFRS when it specifically applies to the Indian economy.

In this section, I take as reference Prashant Shinde’s research paper on the International

Indexed & Referred Research Journal titled “Adoption of IFRS, Challenges for India.” The

following are some advantages seen from converging to IFRS:

• IFRS prevalent as the worldwide accounting standard: In an age where increased

comparability is required, IFRS is recognized as the prevalent worldwide accounting standard

of today. This gained major traction at the turn of the millennium through EU-endorsed IFRS.

Each member of the EU had requirements to use IFRS if it met the criteria. Today, most of

the world’s countries use IFRS.

• Increased comparability: Adoption or convergence of IFRS leads to increased

comparability of financial statements with some of the biggest markets in the

world. Even though the US still uses GAAP, it allows IFRS in its capital markets

because of the volume of its worldwide usage (not to be confused with EUendorsed

IFRS).

• Increased exposure to FDI and FII: Convergence towards IFRS allows investors

from prominent capital markets to make much better-informed decisions

regarding one’s entity. It is always much more advantageous to make a decision

when the format is in something even you use. IFRS also serves as a bridge for

investment companies and possible stakeholders to enter the economy and invest

money into the business environment. There is likely to be high FDI and FII once

the convergence process is done and Ind AS finds its footing. This will, in turn,

result in a long-term effect of reduction in the cost of capital due to investors

making informed decisions.

31

• Increased transparency: When compared to Indian GAAP, IFRS contains a lot of

additional disclosures in various areas, adding more transparency to the Indian

business environment. This gives added security to stakeholders and investors,

who are subjected to much more information with Ind AS when compared to

Indian GAAP. Increased transparency also leads to better communication between

the entity’s stakeholders and its management.

• Convergence allows companies more leeway than adoption: Convergence towards

IFRS as opposed to direct adoption allows companies to smooth its financial

statements from the previously used Indian GAAP better. This is at times

favorable to direct adoption, which could be seen as adding heavy volatility due to

the drastic nature of changes in the Indian business environment.

The following contains some disadvantages or challenges seen from convergence

to IFRS, the world’s most prevalent accounting standard:

Disadvantages

• Still unable to achieve complete comparability: Because India is converging to

IFRS as opposed to directly adopting it, the level of acceptability of Ind AS

financial statements will be less in other capital markets seeing as it is not IFRS in

full. If an Indian company wants to place its financial statements on a prominent

international capital market, it will once again have to provide different financial

statements in accordance to IFRS in order to enter and trade. While using Ind AS

is preferable to using Indian GAAP when it comes to switching towards IFRS, it

is still not as better off as direct adoption of IFRS.

• High degree of difference between Indian GAAP and IFRS: When considering

Indian GAAP, the current accounting standard used by India today, the

differences between it and IFRS are widely seen. In particular, topics such as

PP&E accounting, accounting of financial instruments, investment accounting,

business combination, share based payment, presentation of financial statements,

32

etc. are not seen currently under Indian GAAP. Convergence to IFRS could lead

to big changes in the financial statements of Indian entities, something which may

negatively affect the current Indian business environment.

• Use of fair value measurement under IFRS: The act of using a fair value model is

something alien to the Indian accounting environment, currently. Indian GAAP

bans the use of the fair value model due to its volatile nature, affecting key

measures like EPS and other covenant ratios. It would not be advantageous for a

company with various covenants to convergence towards IFRS unless the fair

value model can be introduced in a proper way conducive to the Indian business

environment.

• Wanton changes required: Due to the wide differences between Indian GAAP and

IFRS, convergence towards IFRS will require that training be provided right from

the grassroots level. For entities with covenants or those who are crunched for

cash for these training programs, this will prove to be a big challenge. Seeing as

the new roadmap indicates that next April will be the start of the first Ind AS

accounting period for several companies, time is running out for these entities to

get its staff acclimatized to Ind AS.

• Two-fold requirement for accounting teams: Not only do accountants need to be

well-versed in Ind AS, they must also know the complementing information

technology when it comes to Ind AS.

• Lack of professionals who know IFRS in Indian business environment: Because

of the current usage of Indian GAAP, not many accountants in India are wellversed

in IFRS. This also applies to the accountants of entities who are soon to

change their financial statements to Ind AS, whether it is the next year or the year

after. Therefore, Indian entities soon to convergence may have to depend on

external advisors and auditors during its first few years for proper assimilation to

Ind AS. This could lead to unnecessary expenditures for the entity, extremely

disadvantageous for entities with not enough liquidity or those that have stringent

covenants.

33

• Tax issues: There is several tax issues associated with convergence to IFRS.

Recognition issues should be considered, such as whether the imputed interest on

credit sales would be considered as sales or interest income. So should

classification issues such as whether the payment on redeemable preference

shares or convertibles should be treated as dividend or interest. Point of

recognition issues, such as whether the services contract would be taxed only

upon completion or at the point of accrual, must also be kept in mind.

Furthermore, one must explore whether the tax base will continue to be

determined using Indian GAAP or convergence to IFRS as well. Finally, one must

explore indirect tax impacts as well as transition issues on the tax treatment for

the one-time adjustments on IFRS convergence.

• The most noteworthy disadvantage of IFRS relate to the costs related to the application by

multinational companies which comprise of changing the internal systems to make it

compatible with the new reporting standards, training costs and etc.

The issue of regulating IFRS in all countries, as it will not be possible due to various reasons

beyond IASB or IASC control as they can not enforce the application of IFRS by all

countries of the world.

Issues such as extraordinary loss/gain which are not allowed in the new IFRS still remain an

issue

Another major disadvantage of converting to IFRS makes the IASB the monopolist in terms

of setting the standards. And this will be strengthened if IFRS is adopted by the US

companies. And if there is competition, such IFRS vs. GAAP, there is more chance of having

reliable and useful information that will be produced during the course of competition.

The total cost of transition costs for the US companies will be over $8 billion and one off

transition costs for small and medium sized companies will be in average $420,000, which is

quite a huge amount of money to absorb by companies.

And even though the companies and countries are incurring huge transitional costs, the

benefits of IFRS can not be seen until later point due to the fact that it takes some years for

the harmonization and to have sufficient years of financial statements to be prepared under

IFRS to improve consistency.

They key problem in conversion to IFRS that has stressed with high importance is the use of

fair value as the primary basis of asset and liability measurements. And the interviewers think

that this principle will bring increased volatility as the assets are reported.

34

And another disadvantage of IFRS is that IFRS is quite complex and costly, and if the

adoption of IFRS needed or required by small and medium sized businesses, it will be a big

disadvantage for SMEs as they will be hit by the large transition costs and the level of

complexity of IFRS may not be absorbed by SMEs.

And moreover, one of the aims of European Union from applying and standardizing the

reporting standards was to increase the international comparability of financial statements;

however, only over 7000 listed companied adopted IFRS from 2005, there were still more

than 7000,000 SMEs in EU, which preferred their national version of reporting standards.

This contradicts the aim of the EU and partly of IFRS in implementing single international

reporting standards.

• Need for consistency between all regulatory bodies: In the buildup to Ind AS

convergence, there must be consistent communication amongst all the regulatory

bodies of India to ensure that everything is going according to plan. This includes

the ICAI, SEBI, RBI and IRDA as well as the National Advisory Committee on. Accounting

Standards (NACAS) established by the MCA.

35

CONCLUSION

The overhaul of Indian GAAP into Ind AS promises to bring about positive

changes for the Indian business environment. The current roadmap relating to the

convergence to Ind AS will start taking practical shape next year, where unlisted and

listed companies having a net worth of 500 crores or more will have to undergo

mandatory Ind AS adoption on 1 April, 2016. This assumption has been taken given that

there will be no further delay regarding Ind AS adoption henceforth.

Indian GAAP has faced several criticisms throughout its tenure as India’s

prevailing accounting standard. One severe criticism has been that Indian GAAP refuses

to adhere to IFRS’ prevailing principle of substance over form in several instances. These

instances make Indian GAAP financial statements not reflect the economic reality of the

entity.

Until July 2007, there was no real attempt to try and converge to IFRS, the world’s

prevailing set of accounting standards. The ICAI’s announcement of a convergence plan

in July 2007 set the wheels in motion towards IFRS convergence. While several delays

have occurred in the buildup to adoption of Ind AS, we believe the current roadmap will

be followed to its completion, leading to Ind AS being introduced in practice from 1

April, 2016. Some Indian entities have already responded to these wholesale changes,

with many of their faculty going through training procedures in order to grasp Ind AS.

A precarious issue when discussing Ind AS is the fact that it is a partial

convergence towards IFRS, not a complete one. Several differences, whether avoidable

or potentially irreconcilable, are seen between Ind AS and IFRS. Most differences in the

literatures of the two have to do with Ind AS possessing options to continue some of the

policies used during Indian GAAP. This is done by the ICAI in order to smooth the

transition from Indian GAAP to something resembling a cousin of IFRS (Ind AS).

Immediate convergence to IFRS will lead to several shocks in the financial statements of

an entity, something the ICAI seems to have extrapolated. Many companies have

intimated concern over complete convergence, a possible reason for why Ind AS was

created. One problem that arises with partial convergence is that while Ind AS is held in

36

high regard amongst the Indian government and regulators of Indian business, outsiders

may not understand its proximity to IFRS. To some, investment decisions regarding

Indian entities might be at the same difficulty as it was when Indian GAAP was in the

Indian business climate. Until international investors are well-versed with Ind AS and

how it differs with IFRS, the full advantages of convergence to IFRS cannot be redeemed

as international investor confidence will not have improved.

When assessing all the differences between Ind AS and IFRS, it must be noted

that repeated delays in the convergence process have led to lesser potentially

irreconcilable differences between the two. Most of the differences between the two

currently are either avoidable or textual. Currently, according to me, there remain three

potentially irreconcilable differences that could hinder any plans the Indian government

or its regulatory bodies have of achieving complete convergence between IFRS and Ind

AS one day.

These are seen in these topics: IND AS 19: Employee Benefits, IND AS

32: Financial Instruments – Presentation and IND AS 103: Business Combinations .

Ind AS 19’s potentially irreconcilable difference with IFRS lies in the fact that

India does not possess a deep market for high quality corporate bonds. However, this is a

problem to which there is an easy solution. Corresponding IFRS literature already

intimates that should there not be a deep market for high quality corporate bonds, government

bonds are used as a reference for finding the discount rate for postemployment

benefit obligations. Ind AS 19, in comparison, states in its literature to only

use government bonds on the basis that India does not possess the aforementioned deep

market. This will create problems in the case of Indian subsidiaries based abroad in

countries that do possess these deep markets. A simple change of the literature of Ind AS

19into what IFRS prescribes will go a long way to reconciling this difference, without

trying to change its meaning or function.

Ind AS 32’s potentially irreconcilable difference lies in the fact that IFRS only

recognizes equity in the form of an entity’s functional currency when it comes to FCCBs,

whereas Ind AS allows entities to recognize equity in any currency. The irreconcilable

difference will lie in the fact that these convertible bonds (able to recognize equity in any

currency) will have components that are only liabilities in accordance to IFRS, whereas

there will definitely be an equity component if one is to follow Ind AS. This difference

37

arises because of Ind AS’ insistence to keep some of the principles held by Indian GAAP

in order to smooth the transition between the two. A solution could be to change the

literature towards something similar to IFRS after initial convergence towards Ind AS has

successfully occurred.

Ind AS 103’s potentially irreconcilable difference lies in the fact that IFRS does

not have the concept of business combinations of entities under common control in its

scope, whereas Ind AS does and prescribes the pooling of interests method to account for

them. This difference is potentially the most irreconcilable out of the three for the sole

reason that IFRS has abolished the concept from its scope. In order to achieve complete

convergence with IFRS on this difference, it is likely that business combinations of

entities under common control will have to be taken off from the scope of Ind AS

literature as well.

Overall, the differences between India’s accounting standards and IFRS are sure

to be at an all-time low once Ind AS is introduced into the Indian business environment,

with the roadmap indicating that it should be in the coming year for certain companies

who have been recognized in the mentioned criteria. Ind AS is a good way for Indian

entities to smooth out their earnings from Indian GAAP to something similar to IFRS.

For Ind AS to be successfully instilled in the business environment, hard work as well as

training starting from the grassroots level needs to be done by entities prescribed to be

adhering to these standards soon. First and foremost, there should no further delays

regarding introducing Ind AS to the environment. Once Ind AS has been successfully

implemented in India, there could be discussion on how to mitigate the potentially

irreconcilable differences between Ind AS and IFRS. It is well within the realm of

possibility that one day, India has the capacity and the resources to completely adopt, IFRS in

its business environment.

38

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